Risk Management – Telecommunication Industry

This article is a second of part of Telecommunication Industry,titled Information Security Governance – Telecommunication Industry.

The Telecommunications sector is characterized by robust competition, vast infrastructure requirements, and very short turnaround times for identifying threats and assessing and mitigating their associated risks in order to minimize network downtime. As customers demands a better service which rising the customer service level bar from telecom organization.

“The way in which consumers communicate is evolving; they are rapidly adopting communities, web self-service and social media for both personal and business interactions. Customer support organizations must adapt their strategies in order to provide effective online tools to engage with the customer on the customer’s terms.” — Telecom Asia

Organizations in the telecom sector are constantly looking for methods and solutions to streamline their processes as a means of reducing organizational risk. Towards this end organizations face challenges reducing silos, ensuring information is consistent across channels and training agents to handle queries.

In addition, telecom firms must comply with regulations set by the Governance laws and regulation for privacy, and other standards (i.e. International Telecommunication Union (ITU), Federal Communications Commission, Sarbanes-Oxley, the Gramm-Leach Bliley Act (GLBA), PCI-DSS and etc). The investment necessary to meet these requirements can be significant, and telecom organization can realize substantial benefits by transitioning their risk and compliance efforts into a structured and controlled process.

Challenges:

Creating a flexible framework to manage both control definition and regulatory requirements with compliance measurements

Implements a robust operational IT risk program, including automating survey workflow throughout the organization, developing key risk indicators for IT, and assessing threats using COSO and other standard methodologies

Demonstrates continuous multi-regulatory compliance with a “test once, comply with many” capability, dramatically reducing the cost, quality and cycle time of testing and reporting

Integrates and automates technical controls by leveraging existing IT investments, by taking in data from vulnerability scanners, CMDBs, IdM systems, segregation of duty systems and other systems to automatically generate reports, drill down to critical controls, and establish priorities based on areas with the highest risk

Migrates over time to standard control frameworks such as ISO 17799/27001, CobiT, and NIST

Leverages best practices and experience built over thousands of security and compliance projects

As the global economy stabilizes and the agenda turns toward growth, the telecoms industry finds itself at a defining moment in its evolution. During the global downturn, the defensive nature of telecoms has been seen as a positive trait, with investors regarding the industry as a safe haven. However, with technology and device companies such as Google and Apple now leading innovation in the sector, and telecoms networks having to cope with a remorseless rise in data traffic, the advantages of this defensive positioning are rapidly diminishing.

A “good” crisis in general, the telecoms industry’s performance for shareholders held up relatively well during the global financial crisis. Telecoms operators’ valuations outperformed other sectors in late 2007 and have sustained that outperformance since. This resilience reflected reduced structural concerns about the industry, investors’ recognition of the importance of scale and network ownership, and the industry’s ability to maintain dividend payouts when these were often falling elsewhere. Customer and public policy factors also supported the perception of telcos as a safe haven for investors. Core telecoms services are seen as nondiscretionary spending that is less vulnerable to cutbacks in a downturn, compared with other types of business, household and personal expenditure.

Regulation for the Broadband World

According to ITU, the national broadband plans, mobile banking, intellectual property rights, open access — there is no single blueprint for best practice, but learning from countries’ experiences is possible. The rapid growth of the digital economy presents huge opportunities for development, creating global markets for applications and services, reducing the cost of doing business, and unleashing creativity and innovation. Extending broadband networks will accelerate this trend.

In an era in which broadband is increasingly considered the right of every citizen, smart regulation will have to continue evolving on a path towards greater openness, offering incentives while turning challenges into opportunities. When drafting national plans, policies and strategies for broadband deployment and takeup, wide-ranging public consultations will help ensure that the investments ahead are based on the collective decisions of government, industry, and society.

Supportive policy and good governance are essential for the success of broadband deployment and take-up. Where returns are insufficient to attract private investment, public funds can be mobilized through public- private partnerships.

Policy-makers and regulators can provide incentives for private-sector investment by adopting enabling policies, simplifying licensing regimes, reducing obligations, and offering tax breaks. Making more spectrum available for broadband wireless services becomes a cornerstone of future growth of the digital economy.

Need for Speed
There is a wealth of recent evidence suggesting that the Internet can contribute significantly to the economy, economic growth, job creation, and innovation in the development of new services and applications. For example, a 2011 analysis of 13 countries by the McKinsey Global Institute found that the Internet contributed 11 per cent of growth over the past five years. This important topic is examined in a report by the Broadband Commission for Digital Development, “Broadband: A Platform for Progress”, published in June 2011

The range and quality of services that can be offered over the Internet is greatly enhanced by faster data rates. High-speed infrastructure is surely a win-win situation — good for consumers, who enjoy greater choice of services; good for governments and national competitiveness in their communications infrastructure and ability to attract foreign direct investment and create jobs in diverse sectors; and good for industry, where operators sell faster Internet connectivity to gain competitive edge and market share at higher prices and, potentially, higher margins (witness the 4G wars, for example).

But how fast is fast enough? And what factors need to be taken into account in setting targets for speed and deploying infrastructure? Speed does not always mean reliability — and the relationship between speed and reliability is not always easy.

Lagging behind on innovation
However, as the economic environment improves, telecoms operators’ status as a safe haven for investors is coming under threat. Investors recognize who is setting the pace in innovation in the sector — and they know that it is high-technology and device companies that are leading the way, rather than operators. Entrants such as Apple and Google have redefined the customer experience, driving the emergence of new models and revenue streams in areas including the handset market, distribution of music and other content, online advertising and software as a service (SaaS). This consistent track record of innovation has strengthened the leading technology companies’ share prices, reflecting their “share of eyeballs” and perceived potential for future earnings growth. As a result, while telecoms and utility stocks have proved robust during times of distress, they are now failing to capture a commensurate share of the high-growth segments in the upturn.

Facing a deluge of data
A related development is that telecoms operators across the world are facing an explosion in the volume of data traffic across their networks. Demand for faster internet services is rising in fixed broadband, while mobile data traffic is growing exponentially, reflecting rapid adoption of smartphones and surging usage of mobile internet services.

This data explosion is emerging against a background of continued constraints on telecoms industry revenues. Global telecoms revenue growth was negative in 2009, and is expected to recover to 8% annually in 2012. Partly as a result, operators are struggling to cope with the new burden on their networks at a time when cost control is paramount.

Wider impacts of the data explosion
The challenge of managing this deluge of data is compounded by regulatory and consumer developments. On the regulatory front, the move toward network neutrality — especially in the US — is further limiting the prospects of a reasonable commercial return on investments in network infrastructure. At the same time, regulatory scrutiny of content and data services is rising in the area of digital rights. Increased data traffic is also generating new privacy and security concerns and requiring operators to implement new systems and processes. Going forward, technology choices must be geared toward coping with rising demand for data. Meanwhile, on the consumer front, users of smartphones such as the iPhone, Samsung Smartphone Galaxy series and among otehrs tend to feel stronger brand loyalty toward their handset than toward the network it uses to communicate. And all-you-can-eat packages mean the heaviest users of innovative new data services are often the least profitable for the operator involved. This paradigm influences and feeds into the majority of the top 10 risks faced by telcos today. From customer profitability to regulatory risk, and from talent management to cost reduction, most of the industry’s key risks are being driven or shaped by the ongoing changes in the industry’s equilibrium.

Data plan sample – U.S.

Data plans sample Globe – Philippines

Data plan sample Smart Communication – Philippines

Top 10 Business Risks for Telecommunication Industry:

1. Losing ownership of the client

Telecoms operators now share their customers with other players in both the consumer and enterprise markets. The key to re-establishing ownership is changing the customer’s mind-set about the value of the network through clear communication and rates.

Losing ownership of the client was ranked as the number one risk in 2009 and retains its top ranking in 2010. In both the consumer and enterprise markets, no single entity owns the customer, with fixed and mobile networks having become a platform for access to a wide number of businesses and services.

At the same time, access services continue to become commoditized and disruptive new entrants are extending their service propositions. In trying to address the risk of losing customer ownership, operators need to balance two conflicting forces. On the costs side, surging data traffic is increasing network management costs, but not generating enough cash to offset declining voice revenues, or to fund the capex needed to ensure network bandwidth keeps pace with exploding data volumes.

Meanwhile, an intensifying cross-sector battle is underway for the loyalty and engagement of operators’ customers. Smartphone users, for example, identify strongly with device manufacturer brands as a reason to switch operators. Elsewhere, cable players are strongly positioned to win in the battle for the triple-play customer, while a new wave of web applications continues to undermine legacy voice and data services.

Changing the customer mind-set

Such challenges are causing operators to seek out new models, tools and messaging to retain customers. These include selling smartphone applications to their customers in return for a proportion of the revenues, and forming content partnerships with online application providers. On the back of strong adoption of mobile broadband, operators are again highlighting their 3G coverage credentials as a competitive differentiator.

However, to manage the risks around customer ownership effectively and sustainably, the key for operators will be to engineer a change in customers’ mind-set to reflect the real and substantial contribution made by telecoms companies to the overall service experience. Getting this message across will require clear and consistent communication on the value of the network, and on what it takes to provide high-quality services. If successful, this communication will make customers realize that a high-quality service experience is not just about the device or application, and that network quality is not necessarily a commoditized “given” with limited financial value.

These messages should be underpinned and reinforced by clear rates that reflect the true cost to serve and reinforce the perceived value of the communications service. This in turn will create leverage for operators to create greater brand affinity and rebuild their previously strong two-way relationship with consumers and business users. Telcos have unique capabilities, such as their billing and payment engines, and their customer information assets reveal a type of end-user ownership that has yet to be fully exploited, either by themselves or through third parties.

The process of changing the customer’s mind-set will take place in two stages: firstly, creating awareness and value of the network, and secondly, innovating to capture more value from the network and ensure it means more to customers than just a pipe. The operators that succeed in winning back ownership of the customer will be those that provide the right combination of differentiated customer experience and value, thereby convincing customers to continue using — and paying for — their particular network service. But this demands investment, from which the financial returns remain uncertain.

2. Failure to maximize customer value

In many cases, operators’ current strategies for retaining customers are actually destroying value; for example, by widening product scope at the expense of revenue and profitability. Operators need to realize the full value of customers by recognizing and leveraging their own transformative power.

Our 2010 research study indicates that the risk of losing ownership of customers is closely followed by a further customer-related risk: failing to maximize the potential value from each customer on the network. This risk, which links to a number of risks highlighted last year, springs largely from the industry’s prevailing approaches to service pricing and bundling.

In recent years, retention strategies have actually been destroying value, with bundled offers in fixed and flat-rate offers in the mobile market having the effect of widening product scope at the expense of product profitability. With consumers now making growing use of mobile internet, new forms of revenue cannibalization are under way, such as substitution of all-youcan-eat mobile data usage for usage-priced SMS.

These anti-churn strategies have served to commoditize the value perception of minutes and bandwidth. But even with their networks increasingly clogged by bandwidth-hungry smartphone applications, and the resulting revenues going elsewhere, operators have been relatively slow to overhaul existing business models. As a result, they now have an urgent need to move beyond the bundle to identify new business models that will capture additional customer value.

To make this transition successfully, operators need to recognize and exploit their own transformative power. Tiered usage policies are increasingly vital, as is striking the right balance between free and premium service elements. Some services — Spotify and YouSendIt, for example — have successfully added premium versions of offerings that were originally free. Drawing on such experiences, telcos have opportunities for re-invigorating their business model by acting as agents of transformation in other sectors — smart metering is a case in point — and by repurposing network assets for third parties such as mobile advertisers. Even in less mature markets, operators’ ability to add value beyond legacy services is clear, with mobile money transfer transforming the lives of unbanked populations in certain African countries.

Many telcos have already strengthened their focus on customer value by reorganizing themselves along customer lines (such as consumer and enterprise divisions) rather than technology lines (such as fixed and mobile). They are also identifying and trying out new models, such as selling smartphone applications in return for a proportion of the revenues, and innovating in partnership with device and application developers to create differentiated experiences. Going forward, operators may go beyond meeting demand for services such as mobile data, and instead actively seek to build or create new demands.

Innovation has long been the lifeblood of the mobile industry, fueling advances across the entire ecosystem. With more than 4.8 billion mobile connections globally, the industry is now at a major turning point as the mobile internet comes to the fore. Just as mobile has connected the world, it is our contention that mobile broadband will connect the world to the internet. In fact, Gartner predicts that mobile phones will overtake PCs as the dominant internet access device by 2013. By then, there will be 1.82 billion smartphones and browser-equipped devices, topping 1.78 billion PCs.

This shift has important implications for mobile operators, who have seen their traditional business — voice services — come under tremendous pressure. The proliferation of bandwidthintensive services has dramatically increased the amount of traffic traversing mobile networks today. At the same time, operators have seen their average revenue per user decline, squeezing margins.

The introduction and growing adoption of mobile broadband can help address this dilemma; however, to truly change this dynamic, operators must be able to deliver innovative, sticky, revenue-generating services. These mobile lifestyle services will allow them to differentiate themselves and grow their top lines, and to offer greater choices for businesses and consumers. The future success of operators and the mobile industry is heavily reliant on the services and experiences that get delivered across this broadband infrastructure.

Adopting a new mind-set: collaboration

The mobile ecosystem has changed dramatically in a relatively short period of time. The entry of major players from the internet world and other market sectors has irrevocably altered the competitive landscape of the mobile industry. Against this backdrop of change, operators continue to be a central force in the mobile industry. Over many years, they have created incredibly powerful assets, particularly rich customer data and established, trusted billing relationships. However, to remain in a lead position going forward, operators need to adopt a mind-set geared toward collaboration, which requires new partnerships and new business models. Otherwise, someone else will move in and capture the value and operators will be relegated to the sidelines.

This need for collaboration is illustrated perfectly in the realm of mobile advertising. Operators have access to in-depth data on mobile user behavior, such as mobile internet sites visited, the amount of time spent browsing, and more. The mobile phone has the potential to offer relevant, personalized advertising on a level that has largely been unattainable until now. However, this potential can only be achieved if mobile is part of a sophisticated, integrated approach to advertising, and this requires operators to work in partnership with brands, publishers and agencies. Operators will be a critical piece of the mobile advertising value chain, but they will never own it alone.

Align behind a common approach

We need to extend this mind-set across the board. As an industry, we now have an opportunity to truly drive the global mobile internet. To do this, though, we need to align behind a common approach. We need to establish a standard across handsets and operating systems. We need a global developer community creating to a common set of application programming interfaces (APIs). We need both network and device APIs to drive the development of compelling new applications. We need a revenue share model that includes the operators.

We need operator portals to serve as integrated app stores providing both business and consumer applications. We need to leverage the sophisticated billing and customer care systems operators already have in place for financial settlement. And we must take a pro-consumer approach, providing choice in terms of devices and operating systems and enabling the portability of applications.

We all know that users want to be able to access all of their services and content whenever they want, wherever they are. We need to create a seamless experience on a mobile device, on a PC, or on home entertainment systems, so that users can take their content with them, regardless of time or place.

That’s the bigger opportunity out there — creating a truly connected lifestyle. And the mobile industry is key to creating this.

3. Rising regulatory pressures

“Network neutrality” is dominating the global regulatory agenda and is widening in the US and other countries to include mobile services. In parallel, diverse regulations are evolving across different segments, and governments are looking to boost tax revenues. The overall need is for greater regulatory certainty.

Given the continuing global shift toward more, not less, regulation, effective management of regulatory-driven risks remains an imperative. The past year has seen the focus of operators’ regulatory risk management continue to shift away from achieving current compliance and toward justifying future investment.

This change of focus reflects the rise of “network neutrality” as the dominant global regulatory issue. Under this concept, operators must try to provide network bandwidth on an equal basis to all applications, irrespective of how much bandwidth each application consumes. With data traffic rising inexorably and unpredictably, network neutrality threatens to undermine the certainty of financial return that operators need in order to allocate the next wave of network capex.

With network neutrality widening to include scrutiny of mobile data access in the US, regulation is continuing to evolve more generally across different segments. Mobile operators are seeing roaming and termination rate reductions as well as the prospect of network neutrality; fixed operators are facing fiber regulation such as network unbundling and duct access; and TV services are facing challenges around content exclusivity.

Regulatory risks are also increasing in emerging markets, with substantial shifts in market structure. Furthermore, telecommunications is universally seen as a focus of government taxation as well as government investment. The global diversity of regulatory approaches is especially evident in the way key industry developments are being handled, such as the rollout of next generation access (NGA).

Against this background, both regulators and companies are pursuing greater regulatory certainty. Higher levels of state support can create new problems for governments, such as dilemmas over whether to focus on closing the digital divide or boosting the fastest speeds in the market. For their part, operators must engage with a wider set of stakeholders to incentivize investment, and successful next generation access (NGA) implementation may often require “hybrid” multipartner models.

Going forward, regulatory risk will remain near the top of industry risk registers. To manage it more effectively, we believe that operators need to develop a clearer understanding of the increasing interrelationship between fixed and mobile policies, the regulatory landscape in adjacent markets, and the considerations surrounding customers’ “digital rights.”

Stimulating NGA investment

The move toward NGA networks is under way in many markets, but plenty of challenges remain. In the UK, for example, we have lost growth in GDP, so the demand side is less buoyant that it would have been.
The question is what public policy can do to accelerate the rollout of NGA, and there are different strands of thought on this. For one, in the absence of government funding, there is a conflict between speeding up competition and promoting access. The incumbents’ potential for delay has to be overcome and regulators are now qualifying their previous positions, with fiber priced on an long term incremental cost-plus (LRIC) basis and higher rates of return made available.

Another strand is public investment, where you can combine the benefits of getting the investment in place and doing it on conditions of open access. Financing can come from either central government, with the focus on less affluent and noncompetitive areas, or via local municipalities. However, external factors alter the prognosis: in Greece, for example, there is a plan to build fiber-to-the-home (FTTH) to a number of homes in Athens, but the state of the public finances is far from conducive to this.

Promoting competition can also be a driver for roll-out, either in terms of duct access or via competing cable and fiber infrastructures, as is the case in the Netherlands and the US. At the same time, there are indirect catalysts for NGA investment, such as the creation of substantial public-sector demand for fiber services.
Ultimately, we still do not know exactly what works and what does not. One of the consequences of this is that the standard division between policy and regulation has become seriously blurred, something evident in the energy sector as well as in telecommunications.

Network neutrality looms large
Network providers present this as an argument in favor of allowing them to discriminate — with both customers and competitors — in a way that validates their network investment. While you can see the logic of that, there is the risk that an operator with significant market power (SMP) can exploit the situation. It is a rather nuanced position that regulators need to take here, using ex-ante interventions and crafting market remedies so that consumers get the good side of discrimination but not the bad. Meanwhile, the scope of network neutrality is evolving. Looking at mobile, the argument here seems weaker because the scope of duplicating networks is much greater than in the fixed world. If content providers are overcharged or excluded, consumers could just switch to a competitor’s more open system, potentially a better network with lower prices. We are also seeing the phrase “search neutrality” appear now: if a content provider is in a dominant position, you have the same kind of worries as with ISP dominance. It may be difficult to avoid a case-by-case analysis of network neutrality.
Convergence considerations
The apparent convergence of mobile and fixed broadband markets could have a major impact on the way we regulate fixed networks. In Austria, the wholesale broadband access market has been formally defined as including wireless, for example, thereby multiplying the number of broadband networks. The risk here is that the whole foundation of fixed network regulation is suddenly overturned. Although few markets are likely to follow the Austrian example, the underlying point is that such decisions could lead to a radical transformation of the way we view SMP in the sector, especially in view of spectrum release policies.

4. Ineffective infrastructure investment

Advancing technology and uncertain returns mean operators face new choices and considerations in their network capex strategies against a background of evolving national policies. The timing of investment is also crucial, with decisions to “leapfrog” technology platforms raising both risks and opportunities.

With telecoms operators facing the need for massive investment in higher-capacity infrastructure, the challenge of investing effectively in networks remains a significant risk area, slipping to 4th this year from 3rd in 2009. It remains essential to have the right infrastructure in place to retain customers and grow revenues and margins as new technologies become available. But the dramatic shortening of the technology evolution cycle means it is getting harder to identify which technology to implement at which point in time.

The risks are compounded by the new and constantly evolving considerations affecting network technology choices. The intensity of capital expenditure remains high — for example, in NGA and long term evolution (LTE). But varying demand- and supply-side factors make it hard to target this investment, with national infrastructure policies still at the work-in-progress stage, and evolved high-speed packet access (HSPA+), regarded by many as superior to LTE from a cost-benefit point of view, at least in the near term. Consolidation of legacy technologies has helped to improve the degree of certainty in decision-making, but consolidation among vendors can increase the risks. Migration paths remain complex for several reasons — including the difficulty of forecasting future demand in areas such as mobile data, the need to assess opportunities for in-market consolidation and network sharing, and determinants related to capex such as digital spectrum availability.

Against this uncertain and fast-changing background, operators must make long-term business-critical judgment calls. The timing of technology decisions is also challenging, and “leapfrogging” technology platforms brings both risks and opportunities. The risks include the fact that upgrading too early can generate customer dissatisfaction and sacrifice interoperability and profitability, that the speeds achieved with emerging technologies can underperform expectations, and that backhaul capacity can come under strain.

Partly as a result of such issues, doubts persist as to the revenuegenerating potential of new services carried on new networks. This uncertainty is increased by the complex interrelationship between customer demand, competitor actions and industrial policy. To mitigate the risks around infrastructure investment, operators need to take into account the wide array of issues highlighted above when making technology choices. However, given the intense competitive pressure to minimize time to market for new services, there are also risks in delaying until things are clearer.

5. Inability to contain and reduce costs

With operators having already capitalized on their “low-hanging” cost-cutting opportunities, the next wave of reductions will be harder to achieve. Companies need to balance innovation and rationalization to control costs while supporting rising traffic volumes.

The risks around controlling and reducing costs rise from 10th place in our 2009 ranking to 5th this year. This upward shift reflects the escalating challenges operators face around costs, given the exponential growth in data traffic and the ongoing evolution in risks on the revenue side. With revenues from legacy services such as voice remaining static or even falling, and the revenue-generating potential of new services still uncertain, operators have no alternative but to cut costs if they are to generate the returns that shareholders demand. For the past two years, they have focused their efforts on harvesting “low-hanging fruit,” such as creating shared services, outsourcing noncore activities, squeezing suppliers and
pruning headcount.

While these tactical cost-reduction programs are well established, a new wave of cost cuts will be more difficult to achieve. Network sharing has yielded some successes, but regulatory and technological hurdles remain. And in many markets, especially in continental Europe, political factors and labor market regulation have hampered companies’ efforts to cut jobs. With their relatively easier cost opportunities now exhausted, telcos need to take a more systematic approach. This means identifying ways to operate the core business with a structurally lower cost base to maintain or increase margins. For example, in emerging markets such as India, other Asian markets and Central and Eastern Europe, the cost challenges are exacerbated by consumers lacking the disposable income needed to support higher-value, higher-priced services. In response, some global operators in these markets have adopted lower-cost massmarket models — akin to budget airlines — in contrast to their higher-value, higher-cost models in wealthier markets.

As this shows, the underlying change is that cost challenges are no longer regarded just as a matter of cutting expenditure. Instead, a holistic perspective that assesses cost control across the business is vital. For example, there are opportunities in network and IT, through general and administration and all the way to marketing and distribution. Network sharing and the development of sub-brands require very different competencies, but the motivations for each have much in common. To seize control of their cost base in a robust and sustainable way, operators need to increase their efficiency and scalability by rationalizing operations and infrastructure to support and monetize high volumes of traffic. They should also simplify their service creation processes to focus more on customer need and make the most of new network architectures. And the progress of the costs program should be benchmarked continually against the business’ strategic objectives in terms of operational efficiency, organizational capabilities and customer experience.

6. Lack of talent and innovation

Technology and handset developers have seized the initiative in industry innovation, with telecoms operators currently relegated to a secondary role. To regain the lead, operators need to make the most of external talent and internal assets, including real-time, location-sensitive customer data.

To grow revenues from the explosion in data traffic and reclaim ownership of the customer, operators have to ensure that their organizations can drive innovation. Telcos must tap a new wave of talent if they are to delight a new generation of consumers, while at the same time deriving their fair share of revenues from new data services.

In recent years, other participants in the digital value chain — notably device manufacturers and online application developers — have seized the initiative in the innovation arena, leaving telcos resembling spectators as new technological innovations emerge. Unlike operators, technology leaders such as Apple and Google do not face revenue cannibalization risks from innovation. In exploiting this advantage, they have shown themselves to be more attuned to what consumers actually want, and better able to innovate to deliver it.

In contrast, operators’ innovation has often been piecemeal, and many new service launches have been essentially defensive — for example, internet protocol television (IPTV) and mobile application stores. This relatively passive approach to market innovation partly reflects a lack of visionary leadership, and an embedded legacy of conservatism following the experience of the dot.com “bubble” and 3G license auctions. This approach has positioned operators as second-tier partners in bringing new concepts to market. When Apple introduced the iPhone, it was able to demand a share of service revenues until the launch of the 3G version of the device in 2008. The slower pace of innovation in telecommunications compared with technology means operators are more likely to react to trends rather than set them, a position that disadvantages them.

To close this innovation gap, operators need to energize their workforce. This will include prioritizing R&D and reasserting their ability to innovate for consumers — an area where they led all industries in the 1990s. The right kind of talent has a pivotal role to play, meaning strategic hires from the technology and media sectors are increasingly a “must have.” Beyond this, operators need to harness communities of innovation. Incentivizing talented application developers that can make the most of the Web 2.0 world is vital. In this way, operators can act as a channel to market for others, and recognizing talent beyond the telecommunications sector is a key part of this process. Such an approach will reposition operators to make the most of the unique assets at their disposal. These include real-time and location-sensitive customer data that opens up new in-house and third-party service opportunities, and the ability to manage the network API opportunity for developers. Leveraging such assets will enable operators to build brand strength on innovation, not just price and trust.

7. Inability to manage Investor expectations

Operators have survived and emerged from the crisis as a “safe haven” for investors — but this status is not enough to sustain investors’ confidence. Telcos can no longer rely on the sector’s defensive nature, and now need to change their story from short-term cash generation to longer-term growth and innovation.

amid ongoing change, it is no longer good enough to try to be a “safe play.” During the crisis, operators’ strong cash flows and balance sheets — partially reflecting their actions following the dot.com bust — helped to make them something of a safe haven for investors. However, while telcos are still generating healthy free cash flow, investors’ reliance on the sector’s defensive nature has an increasingly limited shelf life, for several reasons. For example, while operators’ free cash-flow yield still offers reasonable value, it is no longer regarded by investors as exceptional, now that conditions are stabilizing or improving across other industries. A further negative factor is that “capex creep” is viewed as inevitable by investors, given the need for the industry to invest in capital-intensive projects such as NGA, spectrum acquisition and 3.5G implementations.

Given these considerations, investors are starting to turn away from telcos’ capex and cost-control stories and are starting to look for them to stress a focus on innovation. In this context, Google has been able to make the most of its pervasive customer touchpoints and its platform’s reusability to build shareholder value. In its ninth year after launch, Google’s revenue reached seven times that of Vodafone. And, as Table 2 shows, Google can tell a more positive story than most operators on a range of key metrics. To fight back and manage investors’ expectations more successfully, telcos need to identify, seize and communicate the right value-creating role and positioning in a new value chain. Mission statements based around cost control now actually undermine the credibility of telecoms infrastructure renewal as “transformational.” And mobile operators are losing credibility when playing down the effects of the capacity crunch. Instead, for telcos to win over investors, the sector’s threats and opportunities require greater and more transparent articulation. External key performance indicators (KPIs) also need to evolve accordingly, as do operators’ relationships with governments and other suppliers.

8. Inappropriate systems and processes

Different parts of the business have different needs in terms of systems and processes, and effective management of the legacy business has become even more important in the wake of the crisis. New platforms and policies to support both legacy services and new offerings or models are key.

This risk category has been fine-tuned since last year, when the risks around systems and processes primarily focused on the challenges of supporting new business strategies. In 2010, we have expanded this risk to encompass legacy as well as new business models, reflecting operators’ growing need to manage their “business as usual” more effectively, while also targeting new areas.

The evolution of this risk area underlines the fact that different parts of the business have different needs, and that managing the legacy areas of the business more effectively has become even more important in the wake of the crisis. Legacy services such as mobile voice still account for a significant proportion of industry revenues — up to about 40% in Europe. At the same time, slowing growth in mature markets is recasting the “challenger” operators as increasingly incumbent-like businesses. This means they must combine their new offerings with the ability to retain their large customer bases using legacy services — a balancing act that demands industrialized operational excellence to ensure high-quality service at low cost, while handling ever-rising volumes of traffic.

This imperative is throwing the spotlight onto operators’ operational support systems (OSS), which often have significant shortcomings (see Figure 6). New platforms and policies are key in tackling such issues, and “wait and see” is no longer an option, meaning operators cannot delay with upgrades. New types of efficiencies need to be assessed at the network level, including enhanced policy control and traffic offload strategies such as femtocells, which are small cellular base stations typically designed for use in the home. Many operators also need to re-evaluate their internal KPIs in the light of changing business models and investor demands, and to coordinate their responses across their footprints and geographies to reap the benefits of group-wide consistency and alignment.

However, these efforts face significant hurdles. The rigorous cost cutting of the past two to three years has seen some operators’ platforms slide toward obsolescence at a time when network traffic is surging. Many are reaching the point where the only option is complete platform renewal. While this replatforming is probably not the most pressing item on the board agenda, the fact is that migrating to a new platform will take 18 months or more. So there are major risks in waiting until the existing systems are cracking under the strain. Now may be the time to seize the initiative.

9. Poorly managed M&A and partnerships

Current industry dynamics are favoring various forms of inorganic expansion, ranging from revenue-sharing partnerships to full in-country consolidation. Operators need to develop new competencies and discriminate clearly between situations requiring partnership or M&A.

Many of the characteristics of today’s telecoms industry — including intensifying in-market competition and cost pressures, and the need for major investment in new infrastructure — are drivers of inorganic growth, either by undertaking full-blown M&A or forming strategic partnerships. The risks involved in managing these activities are ranked 9th this year, down from 5th in 2009. To manage these risks effectively, a holistic view of inorganic growth is essential. Inorganic growth initiatives across the industry reflect the move to more efficient market structures. Partnerships — which can act as either a precursor or alternative to M&A — are needed to serve new and hard-to-reach market segments, such as IT services, IPTV and mobile internet. At the same time, in-country consolidation is a growing feature of mature markets, while footprint growth also remains important, as operators pursue scale and volume growth in emerging markets. But caution is required. As well as involving operational and valuation issues, footprint growth can also raise regulatory and political risks, which are increasing in many countries. The risks around partnerships are being compounded by the widening array of structures and objectives involved, including network-sharing deals with other operators, revenue sharing with content and application owners, insourcing of capabilities as “industry utilities” and outsourcing to specialist third parties. Partnering may initially appear lower-risk and lower-cost than M&A, but it actually creates higher day-to-day risks because of the need to maintain ongoing alignment between the organizations involved. The key is to have effective and transparent governance in place from the start.

In terms of full-blown M&A, the primary focus to date has been footprint growth into emerging markets. This rationale is now being superseded by a drive toward consolidation in mature developed markets, involving in-country deals such as Deutsche Telekom and France Telecóm/Orange’s merger of their UK operations, and cross-sector transactions such as Comcast’s proposed purchase of NBC in the US. Currently, the main thrust is to use conservative M&A strategies to help to secure dividend policies, but the focus of M&A could change again. In this dynamic and evolving environment for inorganic growth, operators need to discriminate between the need to acquire and the need to partner, and must develop new competencies to manage both approaches more effectively. In particular, they should confront “co-opetition” and continually reassess their relationship with partners outside the sector, while also tackling the persistent issues around revenue-sharing arrangements. To do this, the requirements for operators include working closely with each other to cut network spending and widen addressable markets, and improving their ability to collaborate
with new types of partners, such as application developers, power providers and technology companies.

10. Privacy, Security and Piracy Risks

The development of the digital society has outpaced the ability to supervise it, and new business models are bringing new threats to the telecoms industry. Security concerns vary by customer, and operators are under pressure from government agendas. They need to revisit the classification and sensitivity of customer data.

Privacy, security and piracy risks remain a long-term issue that operators ignore at their peril. These risks vary according to the customer and stakeholder, be they private individuals, enterprises or governments looking to protect their data and networks. But while the precise concerns vary, telecoms companies face significant and rising costs if they are to manage all these risks effectively. Put simply, the development of the digital society has outpaced the ability to supervise it. Although the nature of the industry means privacy and security threats are endemic, service innovation and changing business models such as Web 2.0 and virtualization are bringing new types of threats. Location-sensitive data supports ad-based revenue models, but can affect customer privacy. More generally, as operators invest in building deeper two-way customer relationships, their growing dependency on customer data increases the risks around it, including the danger of cyberattacks.

The impact of a breach can go far beyond the immediate data loss, potentially triggering a dramatic decline in customer confidence, damaging the business’s reputation and brand, and attracting regulatory penalties. As Figure 7 shows, mobile operators in particular have a lot to lose, since they currently enjoy relatively strong consumer trust in their stewardship of data. On the piracy front, digital rights are an emotive issue due
to their socio-economic implications, and managing risks around commercial content is complicated by the involvement of multiple stakeholders.
Despite the concerns over personal privacy, operators find themselves being pressed by regulators and governments to track ever more detailed data or face tighter regulation. The results of such pressure include the voluntary codes in some countries to help fight terrorism or to prevent children accessing adult content or BitTorrent sites. This steady growth in operators’ responsibilities reflects their unique position at the nexus of rapid social, political, technological and consumer change. To manage the risks around data effectively, operators need to revisit the classification and sensitivity of customer data, and ensure that their systems and processes are future-proofed. They should also work with governments on a continuing basis to define and clarify their responsibilities in terms of content and data.

Approach to risk management

Through its risk management framework, Telecom identifies, assesses and manages risks that affect its business, including specific pan-Telecom risks arising from the business direction and strategic environment. Telecom’s risk management framework is implemented through business processes such as business planning, investment analysis, project management and operations management.

Identify risks that relate to the achievement of their business objectives;

Assess those risks and determine whether they are acceptable under existing controls or whether additional Treatment is required;

Respond appropriately to the risks, based on that assessment; and

Monitor and report on the current status of risks and the effectiveness of their controls.

This systematic approach to managing risk is performed on a planned or embedded basis and is implemented throughout Telecom.

Management regularly reports to the board on the effectiveness of Telecom’s management of its material business risks.

Risk management roles and responsibilities

Risk management takes place in the context of normal business processes such as business planning, investment analysis, project management and operations management. In addition, risk is managed through the delegation of authority framework and other Telecom policies that provide a framework for managing specific pan-Telecom risks arising from the company’s business direction and strategic environment.

To manage financial risks around treasury transactions, the board has approved principles and policies that specify who may authorise transactions and segregate the duties of those carrying them out.

The Audit and Risk Management Committee, Governance Risk and Compliance (GRC) or similar is responsible for ensuring that management has established a risk management framework that includes policies and procedures to effectively identify, treat and monitor principal business risks. The committee also regularly reviews Telecom’s risk profile.

The Telecom’s Committee receives reports on the effectiveness of the implementation of policies and processes designed to manage risk. The Committee receives reports from internal audit on the adequacy and effectiveness of Telecom’s internal controls. The committee regularly reports this information to the board.

CEO/CFO assurance

Telecom requires that its CEO and CFO make an annual declaration in relation to Telecom’s financial statements to declare that: (a) Telecom’s financial records have been properly maintained; (b) the financial statements comply with the accounting standards; and (c) the financial statements give a true and fair view. The board receives a written assurance from the CEO and the CFO that, to the best of their knowledge and belief, the declaration provided by them on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.